EARIE Exclusive: Why Steelworks Can´t Simply Go Green

00:00:08: The steel industry is one of the most difficult sectors to decarbonize.

00:00:28: A lower emission way for making steel has spread widely in the United States over the past four decades, but established steelworks rarely adopted it – instead new plans opened while many existing sites closed.

00:00:42: How can a technology spread across an industry without being adopted at the places where steel was already been made?

00:00:50: And what this history tell us about next industrial transition.

00:00:54: A new study examines every US Steel plant to answer these questions.

00:00:59: My name is Pascal Ausederer and today I am talking with Oinsong Park, researcher in the ZDW Research Unit.

00:01:06: Environmental & Climate Economics.

00:01:09: Welcome podcast Wirklich Wirtschaft.

00:01:12: Hello, Oinsong!

00:01:13: It's great to have you as a guest on my podcast today.

00:01:15: Yeah thank-you for having me here.

00:01:17: Between nineteen eighty five and twenty twenty four the proportion of electric furnaces in U.S.

00:01:23: steel production rose from around a third to more than seventy percent.

00:01:27: nevertheless only a few existing plans were converted.

00:01:31: what is the main explanation given?

00:01:36: Yeah, so the key is to look at where the electric furnace has appeared.

00:01:40: Most were built in new plants while conventional plants closed and their share therefore rose even though few existing sites they changed technology.

00:01:50: So my study finds that changing on old site involved much more than buying a new furnace.

00:01:56: it meant reorganizing an entire steelworks creating a large additional cost.

00:02:01: Two technologies are also used different inputs and they're not equally suited to every product.

00:02:08: How do these two ways of making steel differ?

00:02:11: And what does that mean for carbon emissions, and product

00:02:14: quality?".

00:02:15: So yeah there's two different technologies.

00:02:18: one is the conventional steelmaking and they rely on blast furnaces for iron-making stage.

00:02:24: so in the Iron Making Stage coal was used to turn iron ore into iron and that's where most emissions come from.

00:02:32: And the other technology is called electric arc furnace, or EAF.

00:02:37: they work differently so it melts crab steel in use electricity.

00:02:43: So its direct emission per ton of steel are about one-fifth of conventional rock.

00:02:49: The trade off is that this crab can contain tiny impurities.

00:02:54: So, these impurities make the most demanding kind of steel such as like automotive sheet harder to produce.

00:03:01: You describe the decarbonization of your steel industry primarily as a process involving new market entrance and plant closures?

00:03:10: How exactly did this structural change unfold

00:03:13: so that shift unfurled over several decades?

00:03:16: more than three quarters off emissions reduction came from actually in you electric for assist plants entering alongside the closure of conventional plants and less than one-sixth come from changing existing sites.

00:03:30: So severe downturn in the early two thousand, it accelerated this process.

00:03:36: so conventional steer works.

00:03:38: they were built to operate continuously at a very large scale.

00:03:43: They are difficult to scale back.

00:03:46: when demand prices weakened And many companies went bankrupt and old capacity left market while the electric arc furnaces they kept their capacity continue to grow.

00:03:57: And the crisis accelerated turnover, but it did not make all sides easier to remake.

00:04:04: in your study so-called organizational adjustment costs play a key role.

00:04:09: what does this term mean?

00:04:11: So I explain like with thinking of switching banks when you have bank account and then you find another bank account where... Another bank may offer better terms, but then you have to move regular payments.

00:04:27: You have update your details and you have adopt a new system or download application.

00:04:35: These are hassles and these hassle is switching cost And also it still works.

00:04:40: The same basic idea applies But on much larger scale.

00:04:44: So firm not just buying the new furnace It's changing entire site including the old facilities and people, commitments that are tied to them.

00:04:57: So this is what economists call an adjustment cost And in my study I estimate these costs.

00:05:19: Electric furnace is a disadvantage in demanding products.

00:05:23: It's harder to produce high-quality product with electric aquanas, so the model first accounts for differences on what each plant can produce and earn.

00:05:33: then I estimate cost needed to explain why firms still changed existing sites or why firm didn't change their existing site?

00:05:43: So estimates suggest that adjustment costs make up to sixty percent of the total cost of changing on existing side.

00:05:52: What is a key message from your study for policymakers?

00:05:56: what should they pay particular attention to when promoting industrial transformation?

00:06:01: The policy lesson directly comes from the model, so after estimating costs I can do some kind-of actual simulation.

00:06:11: and if i simulate the current price then it makes conventional plants less profitable But it does not lower the cost of changing on existing steelworks to an electric arc furnace.

00:06:24: So among these existing sites in model, that main response is there for closure.

00:06:30: so they don't change their technology but just go out-of-the market.

00:06:35: and if policy makers specifically want those sites to change technologies They also need a instrument which addresses up front barrier.

00:06:44: So your study looks at changes in the US steel industry over the past decades.

00:06:50: Is it still relevant for Europe today as the industry faces another major transition?

00:06:55: Yes, I think so!

00:06:56: The EUROB is trying to do something U.S.

00:06:59: firms rarely did namely transforming existing steel sites and this time using hydrogen-based production that can make economic sense when a site has strategic assets because they bring together skilled workers or the infrastructure, suppliers and domestic production capacity.

00:07:21: So in US experience show that these assets can disappear even while the industry becomes cleaner.

00:07:27: my research points to practical implications.

00:07:30: when Europe assesses part for a site it should account for full cost of reorganizing not only price of new equipment.

00:07:39: Thank you very much for your time And thank you very much for listening.

00:07:42: That was the ZDW podcast on The Transformation of the Steel Industry with ZDU Economist Oinsong Park.

00:07:50: If you'd like to find out more about this study, please do visit our website zdw.de.

00:07:54: You can also find further information in the show notes or on our social media channels.

00:08:01: My name is Pascal Ausederer.

00:08:03: Thankyou very much For your interest and see you In next episode Of Wirklich Wirtschaft.